Contractors Beware: Many States Take the Position that Foreign Real Property Contracts Are Subject to Domestic Use Tax

A recent Virginia ruling brings up a topic that comes up in our state and local tax practice constantly. If a contractor in State X purchases materials and uses the material in a real property contract in State or Country Y, does the contactor owe use tax on purchases in State X? The answer in most states is yes. Is this fair? Or, even further, is this constitutional?

This scenario was brought to light in a Virginia Letter Ruling, No 12-207, issued on December 13, 2012. In the ruling, the unfortunate requestor was a dealer in Virginia and sold materials to a customer who constructs US embassies overseas. The material purchases are shipped to the dealer’s consolidating receiving point (CRP) in Virginia. The materials are temporarily stored and prepared for overseas shipment.

The ruling started by addressing a Virginia construction company that improves real estate and furnishes tangible personal property to become real estate outside of Virginia. Like most states, Virginia takes the position that, in that scenario, the dealer is the end user of the TPP and owes use tax. However, Virginia has an exemption for contractors who purchase TPP “used solely in another state or in a foreign country.” Specifically, the contractor can obtain a certificate of exemption if certain criteria are met. Further, the Virginia Department of Revenue went out of its way to remind contractors that a resale exemption does not work in this scenario because the contractor is the end user of real property and is not a reseller of TPP.

This evidences one of dozens of rules that may come to a surprise for the uninformed real property contractor. If you are a real property contractor, it is probably advisable to contact your state and local tax professional when beginning a new project or business. For the professionals out there reading this, I would be anxious to hear whether your state has a similar rule. I think you will find most states do.

About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone listed on this page.